IRS Seeks End to Tax Break on Perk

The Internal Revenue Service on Wednesday proposed to sweep away the tax break in a life insurance perquisite many companies give executives.

In proposed new regulations, the agency said executives should pay annual income tax on the cash accumulated in universal and whole life insurance policies when their company pays the premiums. The IRS said the payments amount to an interest-free loan.

The IRS reversed a decision in February that suggested taxes were owed only on the cash value when a policy is terminated, tax and compensation experts say. An estimated 115,000 executives and employers will be affected by the rule, the agency said.

“The employee is going to have to come up with the cash to pay for this tax,” said Ivan Taback, a senior lawyer in the personal planning department at law firm Proskauer Rose in New York.

The proposed rules deal with the tax on so-called split-dollar life insurance arrangements, or ownership and premium payment arrangements that involve some kind of cash-value life insurance such as whole, universal or variable universal life insurance.

Many companies offer such policies to executives as a form of compensation by paying premiums on insurance held by the executive or by a trust set up by the executive.

The IRS became concerned about the arrangements in 1996 because investment accounts funded with corporate dollars were building up cash value tax-free for the executives.

The agency is seeking comments on the proposal until Sept. 7.